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7/26/2019 Swirsky v. National Association, 1st Cir. (1997)
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USCA1 Opinion
United States Court of Appeals United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 97-1038
GERALD R. SWIRSKY,
Plaintiff, Appellant,
v.
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NATIONAL ASSOCIATION OF SECURITIES DEALERS,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge] ___________________
____________________
Before
Selya and Lynch, Circuit Judges, ______________
and Gibson,* Senior Circuit Judge.
____________________
____________________
Gerald A. Phelps for plaintiff-appellant. ________________
David C. Fixler, with whom Michael Unger and Rubin & Ru________________ _____________ __________
were on brief, for defendant-appellee.
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____________________
August 28, 1997
____________________
____________________
* Hon. John R. Gibson of the Eighth Circuit, sitting by design
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LYNCH, Circuit Judge. This case presents an iss LYNCH, Circuit Judge. _____________
of first impression for this circuit concerning whether t
doctrine of exhaustion of administrative remedies applies
certain actions against the National Association
Securities Dealers ("NASD"). We hold that it does,
agreement with the other circuits which have faced t
issue. We therefore affirm the district court's dismissal
the actions because Mr. Swirsky failed to follow the prop
review process in litigating this dispute.
I. Background
Gerald R. Swirsky worked for Prudential Securiti
Inc. as a broker until November of 1992. In November
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1990, Swirsky and Prudential were parties to a N
arbitration proceeding ("the Murray Arbitration") brought
one of Swirsky's customers, who accused them of causing
to lose money by concentrating her position in a singl
risky stock. The customer was awarded $370,260 in dama
jointly and severally from Prudential and Swirsky a
punitive damages of $50,000 from Prudential. Swirsky lo
his job with Prudential as a result of a comprehensi
management restructuring.
Tucker Anthony hired Swirsky soon after he le
Prudential, and fired him on September 16, 1994. Four da
later, the NASD filed a complaint against Swirsky
connection with the Murray Arbitration and complaints by t
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other former Prudential customers. Prior to the terminati
of Swirsky's employment, the NASD informed Tucker Antho
(according to Swirsky) that if Tucker Anthony continued
employ Swirsky, Tucker Anthony would be held as a guarant
of Swirsky's conduct.
To resolve the NASD complaints, Swirsky, whi
represented by counsel, executed an Offer of Settlement a
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Waiver of Procedural Rights, without admitting any guilt,
October 21, 1994. Swirsky avers that during the settleme
negotiations he was unaware of the NASD's "threat" to ho
Tucker Anthony liable as Swirsky's guarantor. Swirs
apparently only learned of this communication through
letter from the General Counsel of Tucker Anthony dat
February 8, 1995.
According to the terms of the settlement agreemen
Swirsky was fined $10,000, suspended from association wi
any NASD member firm for ten days, and waived all rights
appeal. The National Business Conduct Committee of the N
Board of Governors ("NBCC") approved this settleme
agreement, and the local NASD District Business Condu
Committee ("DBCC") issued a Decision and Order of Acceptan
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of Offer of Settlement on January 9, 1995. The NASD fil
the settlement with the Securities Exchange Commissi
("SEC") on March 2, 1995.
-3- 3
Swirsky, represented by different counsel, file
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Motion to Vacate Decision and Order of Acceptance of Offer
Settlement with the NBCC on May 2, 1995. Swirsky asserte
host of claims.2 The NBCC denied Swirsky's motion to vaca
on July 10. Swirsky appealed to the SEC, alleging the sa
claims as in his motion to the NBCC. The SEC declined
review the NBCC decision because Swirsky's motion to vaca
was untimely.3
Swirsky brought suit in federal district court
October 11, 1995. The district court characterized Swirsky
complaint as "essentially a collateral attack on a settleme
he has been unable to undo through the establis
____________________
2. Swirsky raised the following claims: tortio
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interference with contract; tortious interference wi
advantageous relations; fraud; violations of Mass. Gen.
ch. 93A; defamation; procedural due process violations un
the United States Constitution and the Constitution of t
Commonwealth of Massachusetts; violations of 42 U.S.C.
1983; violations of Mass. Gen. L. ch. 12 11H and 11I; a
violations of sections 6(d)(1) and 15A(h)(1) of the Exchan
Act.
3. In a letter dated September 7, 1995, the SEC stated t
following:
Under Section 19(d)(2), an application for review is to
be filed within 30 days after the date notice of the
action is filed with the Commission and received by the
aggrieved person. Even if Swirsky could be considered
aggrieved by a settlement to which he consented, he was
obliged to file an application for review within 30
days of the filing of notice of the action. Swirsky
did not seek Commission review of the action within the
30-day period and has made no showing for the
Commission to consider the extraordinary relief
necessary for a filing outside of the normal time
limits.
-4- 4
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administrative process." Memorandum and Order at 1. T
district court dismissed the complaint because Swirsky
failed to exhaust his administrative remedies. Under t
process established by the Exchange Act, the district cou
said, Swirsky should have appealed the adverse SEC decisi
in federal circuit court. Swirsky now appeals.
II. The Exchange Act
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The Securities Exchange Act of 1934 and i
subsequent amendments create a detailed, comprehensive syst
of federal regulation of the securities industry. T
system's foundation is self-regulation by indust
organizations established according to the guidelines of t
Maloney Act. The NASD is a national securities associati
registered with the SEC pursuant to the Maloney Act whi
provides self-regulation of the over-the-counter securiti
market. See 15 U.S.C. 78o-3. ___
The Exchange Act mandates a three-tiered process
both administrative and judicial review of NASD disciplina
proceedings. At the first level, proceedings are conduct
by the local DBCC with appeal to, and de novo review by, t
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NBCC. The Maloney Act prescribes an array of procedur
safeguards to ensure fairness at this first tier of revie
The NASD must "bring specific charges, notify such member
person of, and give him an opportunity to defend agains
such charges, and keep a record." 15 U.S.C. 78o -3(h)(1).
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The NASD is authorized to impose a number
sanctions, including censure, fines, suspension,
prohibition from association with member firms. 15 U.S.C.
78o-3(b)(7); NASD Rules of Fair Practice, Art. V, 1.
addition to these specific sanctions, the NASD may impo
"any other fitting sanction deemed appropriate under t
circumstances." Id. Sanctions must be supported by writt ___
statements specifying the activity that caused the violatio
the specific provision or rule violated, and the reason f
the sanction imposed.
At the second level, the SEC reviews NBCC fin
orders de novo. 15 U.S.C. 78s(d). Once the NBCC files i
decision with the SEC, disciplinary respondents have 30 da
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to petition the SEC for review. 15 U.S.C. 78s(d)(2). T
SEC can affirm or modify any sanction, or remand to the N
for further proceedings. 15 U.S.C. 78s(e). The SEC
empowered to seek an injunction in district court if the N
"is engaged or is about to engage in acts or practic
constituting a violation" of the securities laws. 15 U.S.
78u(d). The SEC may "censure or impose limitations up
the activities, functions and operations" of self-regulato
organizations (such as the NASD) that violate the Exchan
Act, the rules thereunder, or its own rules. 15 U.S.C.
78s(h)(1). The SEC may remove any officer or director of
self-regulatory organization from office if he or she
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found to have violated the rules or abused his or
position. 15 U.S.C. 78s(g)(2).
The NASD is also subject to extensive, ongoi
oversight and control by the SEC. See United States v. NAS ___ _____________ __
422 U.S. 694, 700-01 n.6 (1975) (The Act "authorizes the S
to exercise a significant oversight function over the rul
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and activities of the registered associations."). With f
exceptions, the SEC must approve all rules, policie
practices, and interpretations before they are implemente
15 U.S.C. 78s(b)(1). Consistent with the requirements
the Exchange Act, the SEC may abrogate or add rules as
deems necessary. 15 U.S.C. 78s(b)(3). The SEC may al
suspend or revoke the license of any national securiti
organization which fails to enforce compliance with t
Exchange Act, SEC regulations, or the organization's o
rules. 15 U.S.C. 78s(h)(1).
The third tier of the process provides for revi
of final SEC orders by the United States Courts of Appeal
15 U.S.C. 78y(a); see Mister Discount Stockbrokers, Inc.
___ __________________________________
SEC, 768 F.2d 875, 876 (7th Cir. 1985) (stating that "fin
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___
orders of the Commission are reviewable only in the Unit
States Courts of Appeals"). Congress believed that t
three-tiered process founded upon self-regulation wou
garner several benefits, including "the expertise a
intimate familiarity with complex securities operations whi
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members of the industry can bring to bear on regulato
problems, and the informality and flexibility of sel
regulatory procedures." S.Doc. No. 93-13, 93d Cong., 1
Sess. 149 (1973).
III. The Merits
The Exchange Act creates a comprehensive procedu
to safeguard due process in disciplinary hearings, and f
administrative and judicial review of NASD disciplina
actions. We agree with other circuits that have consider
the question that the "comprehensiveness of the revi
procedure suggests that the doctrine of exhaustion
administrative remedies should be applied to preve
circumvention of established procedures." First Jers
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__________
Securities, Inc. v. Bergen, 605 F.2d 690, 695 (3rd Ci _________________ ______
1979). See Merrill Lynch v. NASD, 616 F.2d 1363, 1370 (5 ___ ______________ ____
Cir. 1980); see also Nassar & Co. v. SEC, 566 F.2d 790, 7 ________ ____________ ___
n.3 (D.C. Cir. 1977); Roach v. Woltmann, 879 F. Supp. 103 _____ ________
1041-42 (C.D. Cal. 1994); Maschler v. National Ass'n________ _______________
Securities Dealers, Inc., 827 F. Supp. 131, 132 (E.D.N. _________________________
1993); Prevatte v. National Ass'n of Securities Dealer ________ ____________________________________
Inc., 682 F. Supp. 913, 918 (W.D. Mich. 1988). Becau ____
Swirsky failed to invoke the third tier of the revi
process, the district court lacked subject matt
jurisdiction, and it properly dismissed Swirsky's complaint
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-8- 8
The doctrine of exhaustion of remedies is stat
starkly in Myers v. Bethlehem Shipbuilding Corp., 303 U. _____ ____________________________
41, 50-51 (1938), where the Supreme Court noted the "lo
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settled rule of judicial administration that no one
entitled to judicial relief for a supposed or threaten
injury until the prescribed administrative remedy has be
exhausted." (footnote omitted). The central purpose of t
doctrine is "the avoidance of premature interruption of t
administrative process." McKart v. United States, 395 U. ______ _____________
185, 193 (1969). See Portela-Gonzalez v. Secretary of t ___ ________________ _____________
Navy, 109 F.3d 74, 79 (1st Cir. 1997) ("Insisting____
exhaustion forces parties to take administrative proceedin
seriously, allows administrative agencies an opportunity
correct their own errors, and potentially avoids the need f
judicial involvement altogether."); Ezratty v. Commonweal _______ _________
of Puerto Rico, 648 F.2d 770, 774 (1st Cir. 1981) (stati _______________
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that "the doctrine serves interests of accuracy, efficienc
agency autonomy and judicial economy.").
Exhaustion is required if explicitly mandated
Congress, McCarthy v. Madigan, 503 U.S. 140, 144 (1992), b ________ _______
courts may relax this requirement somewhat where Congress
silent. Darby v. Cisneros, 509 U.S. 137, 153-54 (1993 _____ ________
There are "three broad sets of circumstances in which t
interests of the individual weigh heavily against requiri
administrative exhaustion." McCarthy, 503 U.S. at 14 ________
-9- 9
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These exceptions are when the requirement occasions un
prejudice to subsequent assertion of a court action; whe
the agency is not empowered to grant effective relief; a
when there are clear indicia of agency bias or tain
McCarthy at 146-48. See Portela-Gonzalez, 109 F.3d at________ ___ ________________
(1st Cir. 1997). None of these exceptions applyto this cas
Before examining the exceptions to administrati
exhaustion listed above, we refute Swirsky's threshold cla
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that he could not appeal the SEC decision because it did n
constitute a "final order." On the contrary, the SEC lett
is an adjudication of Swirsky's motion to vacate t
settlement agreement. The SEC declined to review the NBCC
decision not to vacate the settlement agreement on the grou
that Swirsky's petition was time-barred. Though based
procedural grounds, the SEC's ruling on Swirsky's petition
final, and Swirsky could have appealed this decision.
Swirsky's clearest argument that the exhausti
doctrine should not apply to this case is rooted
allegations that the NASD is biased against him. T
argument consists of little more than the assertion tha
because the NASD is the defendant in this action, it cou
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not possibly provide him with a fair hearing. We do n
believe that this is enough to demonstrate the kind
-10- 10
thoroughgoing taint which concerned the Supreme Court
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McCarthy.4 The review process here provides for both SEC a ________
court of appeals review after the NASD determination, not
mention review by the NBCC, a separate entity from the DBC
Swirsky has not accused the SEC or this court of unacceptab
bias against him. Though it can be unsettling, it is n
uncommon in administrative law for a litigant's case to
heard in the first instance by the very agency against whi
the plaintiff has a complaint. In this case, resort to t
correct appeals procedure would not have been a "futile act
See Portela-Gonzalez, 109 F.3d at 78-80 (plaintiff requir
___ ________________
to pursue her claim to "the final rung of the administrati
ladder," despite the fact that she had been rebuffed at a
prior stages).
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Neither is resort to the proper review proce
futile in the sense that Swirsky could not have received t
relief he sought. The SEC has extensive powers to modif
reverse and enjoin disciplinary actions by the NASD. As t
Third Circuit has said, "Ultimate review by the court
appeals ensures that constitutional or statutory errors wi
not go unremedied." First Jersey Securities, Inc., 605 F. _____________________________
at 696. See SEC v. Waco Financial, Inc., 751 F.2d 831, 8 ___ ___ _____________________
____________________
4. See McCarthy, 503 U.S. at 148 (citing Houghton___ ________ ________
Shafer, 392 U.S. 639, 640 (1968), where administrative revi ______
procedure culminated with the Attorney General, who
__________
already expressed his views on the merits).
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-11- 11
(6th Cir. 1985) ("By preserving the issue before the N
bodies and the SEC the appellants could have obtained dire
judicial review of their constitutional claims following a
administrative steps.").
Swirsky attempts to avoid these doctrines
distinguishing his action in district court from that befo
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the NASD and SEC. Swirsky's claims are, however, essential
the same as those he raised before the NASD and the SEC
his motion to vacate the settlement agreement.5 Swirs
argues that the harms he suffered as a result of the NAS
"threat" to Tucker Anthony give rise to independent causes
action, analogous to causes of action he would have if a N
employee had punched him in the nose during the course of t
disciplinary complaint. Assaults are not a part of t
NASD's regulatory arsenal, but it is clear that the NAS
communication to Tucker Anthony arose out of a disciplina
action by the NASD. Swirsky's analogy is inapt.
IV. Conclusion
Swirsky's proper course of action, once the S
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denied his appeal, was to appeal to this court. He did n
do so. Swirsky reached this court by a different, a
incorrect, route. At oral argument, Swirsky's counsel stat
that it was "ironic" that this case was now before the Fir
____________________
5. We note that Swirsky was alerted to the NASD "threa
before the settlement agreement was filed with the SEC. ______
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Circuit. The irony instead lies in the fact that Swirs
asks this court to do what he claims could not be done
the proper review process -- a process that should ha
culminated here.
The decision of the district court is affirmed. ________
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